Strategic Management- Group Assignment PDF

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Richard Duff & Samuel Pollock

Strategic Management- Group Assignment In 2016, the Global market for Sleep Apnea devices was valued at USD 5.10 billion (Grand View research, 2016). Of this, ResMed Inc. held, and still holds, a majority claim with over USD 1,530,000,000 in total revenue- representing approximately 30% of the market (IBISWorld, 2016). Founded in June 1989 by Peter C. Farrell, ResMed operates broadly within the Sleep Apnea device market. Primarily it develops, manufactures and markets products across the following four categories:    

Masks- This includes nasal pillows, nasal masks, full face masks and paediatric masks. Devices- This includes both CPAP (Continuous Positive airway pressure) and APAP (Automatic Positive Airway Pressure machines). Accessories- This includes sleep and ventilation accessories such as pads, wipes, tubes and bags. Humidifiers- This includes targeted humidifiers that work to avoid nasal congestion, dryness and mouth breathing.

Global Market Insights (2016) discusses how the SBD device market, driven by lifestyle related changes that are causing cardiovascular diseases, unhealthy sleep patterns and postures, high stress levels and obesity; will continue to climb into the future. Figure 1 shows a consistent increase in revenue (in USD Million) across the forecasted time- period. Year-on year growth forecast to 2022 is expected to be approximately 1.4% per annum. By 2022, the Global SBD devices market is expected to reach over $US7.9 Billion (Grand View Research, 2016). Figure 1.1 Revenue growth rate (in USD)

Figure 1.2 ResMed Inc share price

Source: Global Market Insights 2018 Source: InvestSmart 2018

In line with this projected growth within the overall market, Net revenue for Res Med Inc “increased to $2,066.7 million for the year ended June 30 2017 from $1,838.7 million for the year ended June 30 2016” (ResMed, 2017). This represents an increase in revenue of $228

Richard Duff & Samuel Pollock

million or 12.4%. ResMed’s financial report delves further into how this “increase in net revenue was attributable to an increase in unit sales of devices, masks and accessories” with a decline in average selling prices being noted as an offset to sustained revenue increases (ResMed, 2017). In line with strong financial performance, ResMed Inc has seen upward trending movement on the Australian Securities Exchange since 2011. Figure 1.2 depicts a strong appreciation of the company’s share price with an increase from $2.49 per share from December 2011 to it’s current standing at $12.49 per share in April 2018. Segmented primarily into geographic regions, the market in which ResMed operates is highly competitive. Major competitors within the market include Phillips BV with Fisher & Paykel Healthcare generally seen as a distant third place competitor in the market. Other notable competitors in the market, “many of whom have greater financial, research, manufacturing and marketing resources than Res Med” include DeViliss Healthcare, Apex Medical Corporation and BMC Medical Co (ResMed, 2017). To fully analyse the environment in which ResMed operates; a strategic analysis of ResMed Inc is necessary. This will include an external analysis, which will utilise Porter’s competitive forces and macro-environmental factors to understand the environment of the firm. An internal analysis inclusive of Resmed’s value chain and resources and capabilities will finalise the analysis. EXTERNAL ANALYSIS Porters five forces Porter’s five forces is a model that analyses competitive forces that shape every industry. By addressing the following five factors we will be able to determine the reason behind Resmed’s profitability success. 1. Threat of New entrants Protected, predominantly by complex barriers to entry within the SBD devices market, the threat of new entrants can be considered low. Firstly, the high cost associated with research and development into products that are able to meet the needs of those within this market acts as a dissuader for new companies. ResMed reports the “significant cost” that research and development represents to their company. In the fiscal year of 2017 ResMed invested “$144.5 million, or 7% of…their…. net revenue into research and development” whilst “approximately 14% of our employees are devoted to these activities (ResMed, 2017). The large labour, research and thus capital equipment that is required to operate within this market and the accompanying financial requirements proves to be a large factor in dissuading new entrants into the competition. Similarly, the established nature of ResMed and their perceived quality for products acts as a deterrence to potential competitors. In other words, the familiarity garnered from exposure to brand image leads to increased liking and increased quality perception of a product (Wardle & Solomans, 1994). Especially in the medical and health fields, where feelings such as this are likely exaggerated this is likely to act as a heavy deterrent to potential entrants.

Richard Duff & Samuel Pollock

2. The Power of Suppliers The power of suppliers for ResMed hold a medium to high level of power. ResMed is responsible for manufacturing their own products and note that, the majority of their raw materials are bought “off the shelf” and can be purchased from a range of suppliers/locations. These include materials such as plastic, tubing, rubber and seals. However, they also have several ‘single-source suppliers’ where they purchase “uniquely configured components for their devices. ResMed (2017) identifies how if there was to be a “reduction or halt in supply” they would not be able to assure that they could find a replacement supplier in a timely basis or “that they would be able to reconfigure the devices to integrate the replacement part”. The effect of this occurring would likely have a significant effect on ResMed’s sales and profitability. Further pushed by being unable to guarantee that their inventories would be able to support a prolonged interruption of supply; suppliers to ResMed are likely to have favourable bargaining power. This bargaining power would likely translate into favourable supplier agreements and higher supplier costs. 3. The Power of Buyers Within ResMed’s industry, the power of buyers is relatively high. Customers have a wide level of products and competitors to choose from. With the evolvement of transportation and online businesses customers are able to connect to the world market and purchase products from around the world. As mentioned in the introduction to this analysis, ResMed has a range of competitors including Phillips BV which provide products with variable features at different prices. The ability for the customer to choose a product that provides them with the greatest value acts as a threat to ResMed Inc. 4. Threat of Substitutes Competition posed from substitute products is relatively low due to the unique nature of ResMed’s product. The highly specialised nature of the machines such as CPAP and APAP devices and equipment that ResMed produces means that there exists a very low level substitutable product in the market. However, medical surgery procedures that are designed to treat Sleep Apnea and other associated illnesses that require ResMed’s products does act as an expensive, dangerous but viable substitute. The real risk for ResMed is that they can not guarantee “that physicians will continue to prescribe their products” and that “the development of innovative new products… or the discovery of alterative treatments or potential cures for the conditions that their products treat could ultimately make their products… obsolete” (ResMed, 2017). 5. Level of Competition The market for Resmed’s products can be classified as highly competitive. Characterised by frequent product improvements, established players and rapid evolving technology ResMed needs to ensure it continually develops, manufactures and markets innovative new products in order to stay ahead of the competition. Greater competition could also exist through market consolidation in which ResMed’s competitors “combine their resources… or are acquired by another company with greater resources or become affiliated with customers” of ResMed (ResMed, 2017). Heightened levels of competition could place downwards pressure on ResMed’s product prices whilst also making their products less competitive and

Richard Duff & Samuel Pollock

thus less attractive within the market. ResMed will need to constantly monitor changes in this area to ensure the viability and profitability of the company.

Resmed's industry attractiveness

Figure 1.3 ResMed Industry Attractiveness

A thorough examination of the SDB devices industry, through the lens of Porter’s Five Forces identifies that the industry can be considered as an attractive company to be in. Though the SBD devices market does have high levels of competition and a certain degree of supplier power; with high barriers to entry limiting further competition and low level of substitutability, businesses that operate within this market have the capability to achieve high levels of growth and profit. With the proven brand reputation for quality and innovation, the current grounding in global markets and the financial flows to support the required research and development necessary for constant development, ResMed Inc. stands to be in a great position to continue to tackle and triumph above the challenges that the industry provides. Macroenvironmental trends/forces Political and legal factors Operating within a global environment ResMed finds itself impacted upon by a diverse range of countries’ laws, regulations and tax systems. Increasingly, ResMed has found that governments are becoming increasingly focused on revenue through taxes, especially on multinational corporations like them (ResMed, 2017). If political power was to change relevant tax laws, this could have an adverse effect on ResMed in the form of heightened leakage in the form of tax payable on revenue reducing their profitability, or ultimately; ceasing to be allowed to trade in certain countries. Providing goods within the medical/health field also means that ResMed is subject to extensive regulation and testing of their products before they can go to market. Generally, their products needs to be

Richard Duff & Samuel Pollock

submitted to the FDA (Food and Drugs Administration) for approval, which is a lengthy and costly process. Recent legislation enacted has also required approval to be made for modifications to a previously cleared device. This acts as a risk because if their products fail to comply to these regulations; fines could occur, their products may be recalled or they could even be subject to criminal charges. Technology Technology plays an important role within ResMed’s performance, as changes to medical treatments and products evolve rapidly. This report previously touched on the essential nature of research and development within the field of Sleep Disordered Breathing (SDB) and this needs to be stressed. Companies operating within this industry must ensure that they maintain high levels of innovation and quality to maintain their market share. As researchers are investigating new methods of treatment and even cures for SDB, so that they stay relevant, these companies must invest heavily into R&D to stay in line with or even lead the market worldwide. Social Factors Changes in diet and lifestyles causing obesity, heart conditions and irregular sleep patterns are all leading to a corresponding increase with those being diagnosed and treated for SDB problems. Global Market Insights (2018) describes how as advancements in technology and medicine help people live longer lives and contributes to an aging population around the world, the demand for ResMed’s products continues to rise. As these individuals go out and gain diagnosis and treatment for these conditions, awareness amongst individuals of these respiratory diseases continues to rise. This sees a ripple effect as previously undiagnosed individuals, “expected to be around 80% of those with SDB” (Res-Med,2017) receive a diagnosis and treatment for SDB. This serves as an opportunity for those within the industry to capitalise on this rapidly growing customer base. Companies that can target individuals with products or services that ease newly diagnosed customers into SDB treatment will likely enjoy a competitive edge. Economic Factors Operating in the global market means that ResMed is subject to a range of different exchange rates that can have the potential to affect the import and exportation of their products. Looking particularly at the Australian market, whose dollar has depreciated over the past year against the USD- this discourages spending on exports within the industry as Australian made products offer better value with a higher valued dollar. Similarly, this also presents an opportunity for businesses in this industry to target regions where the exchange rate may be rising and thus customers may be more susceptible or prone to export purchases....